Market Update - August 2026

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Authors

Greg Smith, Investment Specialist

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Global markets




Global equity markets delivered a strong but occasionally volatile month in August, supported by robust corporate earnings, resilient economic activity and continued enthusiasm for artificial intelligence investment. Investors were periodically unsettled by inflation, government debt and geopolitical concerns, but ultimately remained willing to allocate capital to companies demonstrating dependable earnings growth and clear exposure to long-term investment themes. The MSCI World Index rose 2.5% in US dollar terms over the month.


The global economy continued to perform better than many had anticipated. August Purchasing Managers’ Indices pointed to improving activity across the United States, Europe and Japan, with services remaining an important source of strength and manufacturing showing renewed momentum. Artificial intelligence investment is also becoming increasingly visible in the real economy, supporting demand for semiconductors, data centres, power infrastructure, networking equipment and advanced manufacturing capacity.


Bond markets also became an important focus during the month after the US Treasury announced a significant expansion of its longer-dated bond buyback programme. The move was intended to improve liquidity and smooth conditions in parts of the Treasury market, but it also reignited debate around America's growing fiscal deficit and debt burden, which has now surpassed US$40 trillion. Investors responded by pushing the US dollar lower and driving gold prices sharply higher as concerns around fiscal sustainability and government borrowing requirements returned to the forefront.


Artificial intelligence remained the dominant structural investment theme. Early in the month, strong results from Microsoft, Amazon, AMD and Caterpillar demonstrated that AI spending is benefiting not only semiconductor and cloud-computing companies, but also businesses supplying the machinery, energy systems and physical infrastructure required to construct data centres. Later, Nvidia reinforced confidence in the theme by reporting rapid revenue growth and providing an exceptionally strong outlook, triggering a broad rally across semiconductor and AI-related companies.


However, August also highlighted that markets are becoming more selective. Investors rewarded companies able to convert investment into revenue, earnings and cash flow, while remaining less patient with businesses whose spending had yet to produce a clear commercial return. This increasingly discerning approach represents a healthy evolution in the AI investment cycle, with execution and profitability becoming as important as long-term potential.


Inflation and interest rates remained important sources of uncertainty. While energy prices eased during parts of the month and inflation data generally improved, tariffs, supply-chain disruptions and geopolitical tensions continued to complicate the outlook. Recent economic data suggests global growth remains resilient, but central banks remain cautious given inflation is still above target across many major economies.



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United States markets


US equities performed strongly during August. The Dow Jones Industrial Average rose 1.3% the S&P 500 advanced 2.6%, the Nasdaq gained 4.2%. Year-to-date returns remained equally constructive, at 10.7%, 12.3% and 16.7% respectively.


The US economy continued to demonstrate considerable resilience, although the data revealed an increasingly uneven picture. August business surveys were particularly strong, with the composite PMI increasing from 54.5 to 56.0, its highest level since April 2022. Services activity accelerated, while manufacturing remained supported by solid demand despite tariffs, shipping delays and supply constraints. The surveys were consistent with a meaningful acceleration in third-quarter economic activity from the 1.5% annualised growth recorded in the second quarter.


Second-quarter GDP was confirmed at an annualised rate of 1.5%, but the underlying composition was stronger than the headline suggested. Consumer spending was revised higher and business investment increased, while an important measure of underlying domestic demand grew at its fastest pace in more than three years. This reinforced the view that the US economy remains in relatively good shape despite elevated interest rates.


The consumer picture was more mixed. Retail sales declined 0.6% in July and consumer confidence weakened, suggesting some households are becoming more cautious. However, corporate results from Home Depot, Walmart, Target and Gap indicated that spending has not collapsed. Instead, consumers appear increasingly selective, prioritising value and essential purchases while delaying larger discretionary commitments. Elevated mortgage rates also continued to weigh on housing turnover and major renovation activity.

Inflation data provided some encouragement during the month. Consumer prices rose just 0.1% in July, while producer prices were flat. The softer readings initially reduced expectations of another near-term Federal Reserve rate increase. However, the Fed’s preferred inflation measure remained elevated, with annual headline Personal Consumption Expenditures inflation at 3.7% and core inflation at 3.3%. This left policymakers with limited scope to signal that the inflation challenge had been resolved.


Federal Reserve Chair Kevin Warsh reinforced this cautious approach at Jackson Hole, the closely watched annual central-bank symposium where policymakers often use speeches to communicate their views on the economy, inflation and interest rates. Rather than providing explicit guidance about the next interest-rate decision, he encouraged investors to focus on incoming economic data and warned that recent improvements did not yet demonstrate a decisive change in the underlying inflation trend. Bond yields rose following the address as markets interpreted the message as modestly hawkish.


The broader earnings season was also highly supportive for markets. With almost all S&P 500 companies having reported, approximately 86% exceeded earnings expectations and 77% exceeded revenue forecasts. The blended earnings growth rate for the second quarter reached 52%, representing the strongest earnings growth since the post-pandemic recovery period in 2021. While artificial intelligence remained a key driver of profit growth, the strength of earnings was evident across a broad range of sectors, reinforcing confidence in the resilience of corporate America despite ongoing economic and geopolitical uncertainties.





European markets


European equity markets produced mixed returns during August. The EURO STOXX 50 rose 1.0%, while the FTSE 100 declined 0.4%. Year-to-date, the indices remained up 10.9% and 9.0% respectively.


Economic activity showed encouraging signs of improvement. Eurozone business surveys rose to their highest level since November, with manufacturing recording its strongest expansion in more than four years. Germany was an important contributor to the improvement, while investment associated with technology equipment and AI-related infrastructure provided additional support to industrial activity.


The United Kingdom also continued to grow, although at a more subdued pace. Second-quarter GDP expanded 0.4%, down from 0.6% in the first quarter, as higher energy costs and Middle East-related disruption weighed on activity. Services remained relatively resilient, but the region continued to face elevated borrowing costs and cautious consumer demand.


Inflation remains the principal challenge for European policymakers. Energy costs, tariffs and supply disruptions continued to place upward pressure on prices, limiting the ability of central banks to contemplate rapid policy easing. The environment therefore remains one of modestly improving growth but persistent inflation uncertainty, favouring companies with pricing power, resilient margins and dependable cash flow.




Asian markets



Asian markets delivered mixed returns during August. Japan remained one of the strongest major markets, with the Nikkei 225 rising 3.0% during the month, and extending its year-to-date gain to 31.7%. Mainland China’s CSI 300 gained 0.8%, while Hong Kong’s Hang Seng Index declined 1.2%.


Japan continued to benefit from a weaker yen, improving export demand and investment in technology-related industries. Business surveys rose to their second-highest level in more than three years, while demand for semiconductor equipment, advanced manufacturing and data-centre infrastructure remained supportive. However, inflationary pressures also remained elevated, keeping the possibility of further Bank of Japan policy tightening in focus.


China’s economic recovery remained less convincing. Industrial profit growth slowed to 11.2% in July, its weakest pace of the year, reflecting subdued domestic demand and reduced support from earlier commodity-price gains. Technology-related industries, including electronics and semiconductor manufacturing, continued to perform comparatively well, but profitability across many traditional sectors remained under pressure.


The contrasting performances within Asia reinforced the region’s increasingly differentiated outlook. Japan continues to benefit from export demand, currency support and technology investment, while mainland China remains more dependent on improved domestic confidence and further policy support.



Australian markets



Australian equities produced a positive month, with the S&P/ASX 200 rising 1.1%. As at the end of June the index is up 4.15% year-to-date.


The Australian economy continued to present a mixed but broadly resilient picture. The Reserve Bank of Australia left the cash rate unchanged at 4.35%, but maintained a cautious tone, emphasising that inflation remained too high and that rate cuts were not under consideration. Later in the month, the RBA’s preferred trimmed-mean inflation measure remained at 3.6%, while household spending increased 7% over the year to July. The combination of broad inflation pressures and robust spending reinforced the possibility that further tightening could still be required.


The labour market showed clearer signs of cooling. Unemployment rose to 4.5% in July, employment declined by 15,800 positions and underemployment increased to a two-year high. The softer employment report reduced expectations of another immediate rate rise, but policymakers are likely to require more evidence that inflation and demand are moderating before ruling out further action.


Housing was another area of weakness. Australia’s major banks reported a broad slowdown in mortgage applications following higher interest rates and changes to property tax concessions. Westpac, Commonwealth Bank, ANZ and National Australia Bank all pointed to softer housing demand, particularly among investors. While current bank profitability remains relatively healthy, slower mortgage growth and greater competition for borrowers may make future earnings growth more challenging.


The corporate reporting season nevertheless provided several encouraging signals. BHP reported that copper had overtaken iron ore as its largest earnings contributor for the first time, reflecting growing demand associated with AI infrastructure, electrification and renewable-energy investment. Consumer-related results also suggested household demand remains more robust than many feared. Coles, Woolworths, Scentre Group and Qantas all reported continued spending or demand despite elevated interest rates and cost-of-living pressures. However, consumers remain value-conscious and increasingly responsive to promotions, while housing-related spending is considerably weaker.




New Zealand markets


The New Zealand equity market delivered a modestly positive August, with the S&P/NZX 50 Gross Index rising 1.3%, up 0.9% year to date.


The domestic economy continued to display a mixed but gradually improving picture. Unemployment increased to 5.6% in the June quarter, its highest level in more than a decade, confirming that higher interest rates have continued to weigh on the labour market. However, filled jobs subsequently rose 0.3% in July, while confidence surveys, tourism data and corporate trading updates suggested activity may be stabilising beneath the surface.


Business activity indicators were generally constructive. Manufacturing remained in expansion territory, while the services sector returned to modest growth. Tourism continued to recover, with overseas visitor arrivals reaching 3.67 million in the year to June and Australian arrivals exceeding 2019 levels. Consumer spending also improved in selected categories, although households remained cautious and value-conscious.


New Zealand’s export economy remained a notable source of strength. Goods exports reached $7.4 billion in July, 14% higher than a year earlier, supported by dairy, meat and horticultural products. Imports rose even faster, producing a $1.9 billion monthly trade deficit, but much of the increase reflected higher fuel costs and stronger imports of vehicles, machinery and equipment rather than weakness in export demand. Annual exports exceeded $84 billion, reinforcing the resilience of the primary sector.


The corporate reporting season provided some encouraging domestic signals. Vulcan Steel reported its first year-on-year increase in underlying volumes in four years, indicating that conditions across construction, manufacturing and infrastructure may be beginning to stabilise. Port of Tauranga exceeded expectations, while Fisher & Paykel Healthcare upgraded guidance following strong hospital demand and improving margins. Fletcher Building, Spark and The Warehouse Group also provided evidence that restructuring, cost control and balance-sheet repair are starting to produce tangible results.


The reporting season was not defined by booming demand. Instead, it demonstrated that New Zealand companies are increasingly adapting to challenging conditions rather than waiting for the economy to recover. Management execution, capital discipline and market-share gains became important differentiators, with several companies reporting stabilising volumes or improving trading despite continued pressure on households and domestically focused sectors.


Artificial intelligence and electrification were also prominent themes. Contact Energy’s proposal to explore a 250-megawatt data centre at Stratford illustrated the potential for AI and cloud computing to create a significant new source of electricity demand. Investments by Contact, Mercury, Meridian, Genesis, Vector, Infratil and Chorus demonstrate how New Zealand companies are beginning to position for increased demand for renewable generation, electricity networks and digital infrastructure.


Since month end, the Reserve Bank of New Zealand increased the Official Cash Rate by 25 basis points to 2.75%, a move that had been widely anticipated by financial markets. While interest-rate increases are typically viewed negatively by borrowers and investors, market reaction was relatively constructive. The accompanying Monetary Policy Statement was interpreted as less hawkish than some had feared, with policymakers emphasising that future decisions would remain data dependent rather than committing to a prolonged tightening cycle.


The Reserve Bank acknowledged that inflation remains above target and that further increases cannot be ruled out. However, easing inflation expectations, a soft labour market, subdued housing activity and evidence of spare capacity across the economy suggest policymakers are seeking to balance inflation risks against the need to support an emerging economic recovery. Bond yields declined following the announcement as investors scaled back expectations for the extent of future rate increases.


The decision reinforces the view that while monetary policy remains restrictive, the Reserve Bank is not seeking to tighten policy unnecessarily. Instead, incoming economic data will play an increasingly important role in determining whether further action is required over coming months.




Portfolio positioning


August reinforced the importance of maintaining exposure to durable structural growth themes while remaining disciplined around quality and valuation. Artificial intelligence continues to create significant opportunities across cloud computing, semiconductors and software, but its influence is increasingly extending into less obvious areas such as fibre connectivity, electricity generation, copper, engineering equipment and data-centre construction.


The breadth of the opportunity supports a diversified approach. The companies likely to benefit are not limited to the most prominent technology platforms. Businesses supplying power, cooling, networking, advanced manufacturing equipment and essential commodities may also experience sustained demand as the buildout continues.


At the same time, August demonstrated that high expectations leave little room for disappointment. Our investment team remains focused on businesses with sustainable competitive advantages, strong balance sheets, attractive long-term growth prospects and the ability to convert investment into earnings and free cash flow. In a market becoming more selective, execution and valuation discipline are likely to remain increasingly important.


Looking ahead - market outlook


Markets enter September with a constructive growth backdrop but a more complicated policy environment. Economic activity across the major developed economies remains resilient and corporate earnings have generally been strong. However, inflation remains above central-bank targets, energy and tariff pressures have not disappeared, and governments face growing scrutiny over debt levels and borrowing costs.


In the United States, investors will continue to assess whether robust activity and AI-related investment can support earnings without creating renewed inflation pressure. The Federal Reserve’s reduced emphasis on forward guidance means each inflation, employment and activity report may have a greater influence on markets.


China also remains important. A sustained improvement in domestic demand and industrial profitability would provide broader support to regional markets and global commodity demand. Until clearer evidence emerges, investors are likely to remain selective, favouring technology and export-oriented industries over businesses dependent on a rapid domestic recovery.


In Australia and New Zealand, the interest-rate debate remains finely balanced. Both economies are showing signs of resilience, but inflation has not moderated sufficiently for policymakers to relax. Household spending, employment, housing activity and business confidence will therefore remain important indicators of whether central banks can return policy towards neutral without undermining the recovery.


The broader investment narrative remains constructive. Artificial intelligence is increasingly influencing physical investment, industrial activity, commodity demand and electricity infrastructure, while corporate reporting seasons have demonstrated the value of strong management execution. August showed that economic growth is proving more durable than expected, but it also reinforced that investors are becoming more demanding. In this environment, diversification, selectivity and a continued focus on long-term fundamentals remain essential.





Market Update - September 2026

Categories

Authors

Greg Smith, Investment Specialist

Published


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Rates and bond yields moved higher, but resilient growth, strong earnings and continued AI investment kept equity markets broadly supported.

 

Market performance


Index

September

Year to date

S&P 500

-0.5%

+11.8%

Dow Jones

-4.3%

+5.9%

Nasdaq

+1.9%

+15.6%

FTSE 100

-2.0%

+6.8%

EURO STOXX 50

-2.4%

+32.6%

Nikkei 225

+0.7%

+32.6%

S&P/ASX 200

-3.2%

+0.9%

S&P/NZX 50 Gross

0.6%

+2.1%



Global markets




Global equity markets delivered mixed returns during September. The global economy remained relatively resilient, supported by solid labour markets, ongoing consumer spending and continued business investment. Technology-led indices generally performed better, underpinned by strong AI-related earnings momentum and capital spending, while more traditional and economically sensitive sectors were weaker as rising bond yields and tighter monetary policy weighed on sentiment. The result was a widening gap between technology beneficiaries and the broader market.


Geopolitics remained an important source of volatility. The United States and China extended their trade truce, although the strategic contest increasingly centred on artificial intelligence and technological leadership. Tensions with Iran also moved oil prices through a relatively wide range (Brent traded roughly between US$90 and US$110 a barrel) as markets assessed proposals to reduce risks around the Strait of Hormuz. Energy therefore remained the key link between geopolitics, inflation and central-bank policy.


The month was unusually busy for monetary policy. The Federal Reserve increased interest rates by 0.25 percentage points, while the Bank of Japan also tightened policy as it continued to move away from decades of ultra-loose monetary settings. The European Central Bank raised rates for the second time this year, citing renewed energy-driven inflation risks. Meanwhile, the Bank of England held its policy rate unchanged, although three of nine policymakers voted for an increase. Despite higher interest rates and bond yields, economic activity across most major economies remained reasonably resilient (as evidenced by PMI readings). These decisions reinforced the message that inflation had improved from its peaks but had not yet been fully contained.


One of the defining market moves during September occurred in bond markets. The US 10-year Treasury yield rose to 5.3%, its highest level since 2007, while the 30-year Treasury yield reached 5.6%, its highest level since 2002. The move reflected resilient economic growth, persistent inflation pressures and expectations that interest rates may remain higher for longer. Rising yields created headwinds for many traditional sectors and contributed to the divergence between technology-led markets and the broader equity market.


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United States markets



The US economy continued to outperform during September, although market performance was mixed beneath the surface. The S&P 500 declined 0.5%, while the technology-focused Nasdaq gained 1.9% and the Dow Jones fell 4.3%, reflecting the continued divergence between technology leaders and more traditional sectors.


Business surveys pointed to the strongest output growth since 2021 and consumer spending remained robust. Headline inflation remained elevated, but core inflation was more contained, suggesting that much of the renewed pressure was concentrated in energy and transportation rather than spreading evenly across the economy. Consumer confidence remained unusually weak relative to the strength of employment, spending, earnings and financial markets, highlighting a continuing disconnect between reported sentiment and observed activity.


The Federal Reserve increased its policy rate by 0.25 percentage points to 3.75%–4.00%, its first increase in three years. The decision was unanimous and Chair Kevin Warsh emphasised that inflation had remained too high for too long. Most committee members expected at least one further increase before year-end, keeping the path of policy dependent on incoming inflation and employment data.


Artificial intelligence remained the strongest corporate theme, and continued to broaden during September. Investor enthusiasm increasingly extended beyond the largest technology platforms and into the wider ecosystem supporting artificial intelligence, including digital infrastructure, semiconductor supply chains, networking and data-centre investment. This reinforced the view that AI spending remains in the early stages of a multi-year investment cycle rather than being confined to a small number of high-profile companies.


Valuation remains one of the key debates for investors. On a traditional price-to-earnings basis, the S&P 500 trades broadly around its long-run average on a forward basis. However, valuations appear more reasonable when adjusted for expected earnings growth. Strong profit growth expectations, particularly across technology and AI-related businesses, have kept growth-adjusted valuation measures below historical averages. While investors are rightly focused on elevated market valuations, the relationship between price and expected earnings growth remains more supportive than headline multiples alone would suggest.


That does not remove valuation risk, but it helps explain why equities remained resilient as bond yields rose: earnings expectations continued to grow faster than the increase in the cost of capital.


European & Asian markets



European equities weakened during September, with the FTSE 100 down 2.0% and the EURO STOXX 50 down 2.4%. Both remained positive year to date. Growth was modest but positive, while higher energy prices lifted inflation and complicated the policy outlook. The European Central Bank raised rates for the second time this year, while the Bank of England held at 3.75% despite a 6–3 vote that showed growing concern about inflation.


Japan continued to stand out, with the Nikkei 225 gaining 0.7% in September and 32.7% year to date. Performance continued to be supported by the country's strong exposure to technology and semiconductor companies, which remain important beneficiaries of ongoing AI infrastructure investment. The Bank of Japan raised its policy rate to 1.25%, continuing the gradual unwind of decades of ultra-loose policy.


Chinese equities were weaker: the CSI 300 fell 5.8% during September and the Hang Seng declined 3.7%. Economic releases remained mixed. Industrial activity and export orders showed signs of improvement, but the domestic recovery remained uneven and consumer demand was less convincing. The extension of the US–China trade truce reduced the immediate risk of escalation, although competition over technology and artificial intelligence remained unresolved.




Australian markets



Australian shares weakened during September, with the S&P/ASX 200 falling 3.2% and moving 0.4% lower year to date. Stronger-than-expected growth and a resilient labour market gave the Reserve Bank of Australia room to increase the cash rate to 4.6%, its fourth rise of the year. Policymakers said further increases remained possible, but also acknowledged that policy was already restrictive and that the cumulative effect of earlier tightening was still working through the economy.


Confidence indicators showed the pressure on households and businesses. The ANZ-Roy Morgan consumer-confidence measure fell as higher living costs and the prospect of additional rate increases weighed on households. Business confidence also remained below long-run averages, although firms reported some improvement in their own financial position and investment intentions.


The economy remained distinctly two-speed. Infrastructure, technology and mining investment continued to support activity, while households faced higher mortgage costs and subdued confidence. Employment rose by ~40,000 jobs in August, but unemployment also rose to 4.6%, the highest since late 2021, as workforce participation increased and part-time jobs accounted for much of the gain. This combination of persistent inflation and softer domestic sentiment left the RBA balancing the need for price stability against the risk of placing further pressure on consumers.




New Zealand markets



The S&P/NZX 50 Gross Index declined 0.6% in September but remained 1.0% higher year to date. New Zealand’s recovery continued to broaden, although the underlying data still pointed to an uneven, two-speed economy.


New Zealand's economy grew 0.2% in the June quarter, following 0.9% growth in March. The result was stronger than expected and highlighted the economy's resilience in the face of higher oil prices and global uncertainty. Growth was supported by construction and exports, particularly meat and dairy, although consumer-facing sectors remained weaker. Overall, the economy continues to recover, but the improvement remains uneven.


Business activity indicators were encouraging. The Performance of Manufacturing Index eased from 54.3 to 53.1 in August but remained comfortably above the 50-point expansion threshold, with growth becoming broader across industries. The Performance of Services Index also improved, rising from 50.6 to 51.2 and lifting its three-month average to the highest level since mid-2023. Together, the surveys were consistent with annual economic growth of around 2%, although the recovery remained gradual rather than broad-based.

Household confidence remained the softer part of the picture. The September source pack reports the ANZ-Roy Morgan Consumer Confidence Index at 97.6, broadly unchanged and still below its long-run average. Households reported modestly better personal finances, but spending intentions remained subdued. Inflation expectations provided some encouragement, with the two-year measure declining to 4.5%, its lowest level since March 2025.


Business sentiment however was considerably stronger. The ANZ Business Outlook showed headline confidence easing slightly from +53.7 to +51.9, while firms’ expected own activity held at +47.9. Inflation expectations were broadly unchanged at 3.25%, with manufacturing and construction performing relatively well while retail and services remained softer. The survey continued to point to a constructive but bumpy recovery.


The Reserve Bank of New Zealand increased the Official Cash Rate to 2.75%, but its more balanced and data-dependent message reduced expectations of an aggressive tightening cycle. Higher oil prices and global yields remain risks, while soft labour-market conditions, spare capacity and subdued housing activity argue for a measured approach.


Corporate updates were encouraging. Fonterra reported strong underlying momentum across its ingredients and foodservice businesses, an important result for New Zealand given dairy’s contribution to export earnings and regional incomes. The result also indicated that earnings generated since the Mainland divestment had recouped the earnings given up through the sale earlier than initially anticipated. Almost $20 billion has flowed back to farmers, shareholders and unit holders, providing meaningful support to regional New Zealand. Amongst the retailers, Hallenstein Glasson also delivered substantial profit growth and The Warehouse returned to profitability.



Portfolio positioning


September strengthened our view that the AI opportunity extends well beyond the best-known technology platforms. Demand is flowing through to memory, optical networking, semiconductor equipment, cloud infrastructure, power and data-centre construction. Exposure across this broader ecosystem can provide a more diversified way to participate in the theme.


At the same time, higher bond yields increase the importance of valuation and cash generation. We remain focused on companies with durable competitive advantages, strong balance sheets and the ability to translate investment into sustainable earnings. Active selection matters most when the gap between winners and losers is widening.


Looking ahead - market outlook



Markets enter October with growth still resilient but policy settings more restrictive. Investors will be watching whether softer inflation and employment indicators are enough to stabilise bond yields, or whether central banks need to tighten further.


Oil remains an important wildcard, particularly for inflation expectations. However, the global economy is less energy-intensive than it was during earlier commodity shocks, and corporate earnings have continued to absorb higher financing costs. The central question is not simply how high rates move, but whether profits can keep growing faster than the cost of capital.


For long-term investors, the backdrop remains constructive but selective. Diversification, quality and valuation discipline remain essential, alongside exposure to structural themes that can continue to grow through a changing economic cycle.


Official Source Index 

The links below point to official data, research and monetary-policy pages referenced in this market update. 


Market Update - October 2026

Categories

Authors

Greg Smith, Investment Specialist

Published


section image


October Market takeaway


An AI-led sell-off saw the Nasdaq record its weakest month since March 2025, although broader markets proved more resilient. The average stock rose, bonds rallied and central banks held rates steady, reinforcing October’s reminder of the value of diversification. Attention now turns to a pivotal November, with Anthropic’s expected listing set to provide another important test of AI valuations. The US midterm election result also introduces a new political dimension for the AI trade, particularly around the policy outlook for data-centre investment.

 

Market performance


Index

September

Year to date

S&P 500

-0.9%

+10.7%

Dow Jones

+1.7%%

+7.7%

Nasdaq

+5.3%

+9.4%

FTSE 100

-1.2%

+8.0%

EURO STOXX 50

-2.2%

+5.8%

Nikkei 225

-5.2%

+25.7%

S&P/ASX 200

+1.4%

+2.2%

S&P/NZX 50 Gross

-0.3%

+1.8%



What shaped gobal markets in October?



October was a month of two halves beneath the surface. Technology and AI-linked shares sold off sharply as investors shifted their attention from how fast AI revenue is growing to how much it costs to deliver, and the major US hyper-scalers’ earnings at month-end sharpened that debate. The Nasdaq Composite fell 5.3%, to be around 8% below its record set earlier in the month.

Elsewhere the picture was far healthier. Nine of the eleven S&P 500 sectors rose, led by energy, consumer staples, utilities and health care, as the S&P500 itself slipped just 0.9%. That was the largest outperformance of the average stock over the index since April 2009. The lesson is about concentration: technology and communication services now make up close to half of the S&P 500, so a sell-off in a handful of AI names was enough to hide a strong month for the typical company.



READ MORE


Geopolitics stayed in the foreground. Attacks on shipping around the Strait of Hormuz were the most frequent since the conflict began in February, and Brent crude rose roughly 13% in October, its fourth consecutive monthly gain, to finish above US$110 a barrel. Energy was the best-performing sector in the S&P 500, and Big Oil reaped the rewards, with ExxonMobil’s quarterly profit more than doubling and Chevron’s almost tripling as tight refining capacity lifted margins.


The global economy has nevertheless proved hard to knock over. The International Monetary Fund expects global growth of 3.1% this year and 3.4% in 2027, and estimates that the closure of the Strait of Hormuz, which could have cost about 0.9 percentage points of 2026 growth, will moderate to 0.3 once supply responses elsewhere and the world’s lower oil intensity are counted. China added to the sense of resilience, with third-quarter GDP growth of 4.5% a touch ahead of expectations, although property investment is down more than 20% this year and Chinese shares were weak in October.


Rates, inflation and bond yields


The message from central banks during the month was patience with a hawkish tilt. The Federal Reserve held its policy rate at 3.75%–4.00% by a 10–2 vote, with both dissenters preferring an increase, and signalled it can afford to wait for more data. The European Central Bank held its deposit rate at 2.50% after two rises this year, with euro-area inflation at 3.8%. The Bank of Japan held at 1.25% in an 8–1 vote, noting that underlying inflation is now broadly consistent with its 2% target, a milestone after decades of deflation. Markets still expect further tightening to remain possible at the Fed, the ECB and the Bank of England.


Bond markets, which dominated September, calmed. The US 10-year Treasury yield briefly touched 5.34% at the start of October, its highest since 2002, before finishing the month at about 4.93%. That came despite inflation moving higher again: US CPI rose to 3.7% in September, producer prices rose 6.3%, and the Fed’s preferred PCE measure rose to 3.6% (3.1% excluding food and energy), with oil the main driver.


What shaped United States markets?



The US economy remained strong. Third-quarter GDP grew at an annualised 3.4%, ahead of expectations and up from 2.2% in the June quarter, with consumer spending up 3.8% and business equipment investment particularly strong. Corporate earnings were strong again: with 60% of S&P 500 companies reported, third-quarter earnings growth is running at about 30%. S&P Global’s flash PMIs for October showed strong levels of expansion for both the manufacturing and services sectors.


The US banks also delivered a solid earnings season. Results from JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley were supported by resilient net interest income, healthier investment-banking pipelines and strong trading activity. Credit quality remained broadly manageable, although management teams continued to monitor pressure on lower-income consumers and the effect of higher funding costs.


Elsewhere, company updates were mixed but generally consistent with a resilient US consumer and continued investment in long-term growth. SpaceX reported further expansion across Starlink and its launch business, while Tesla’s result showed revenue growth but continued margin pressure as pricing, product investment and manufacturing costs weighed on profitability. American Express delivered another strong quarter, supported by higher cardmember spending, fee income and customer growth, with credit trends remaining broadly stable. Results from several key ‘bellwethers’ reinforced the story around resilience, with Coca-Cola, Visa, UPS and FedEx all reporting solid growth and lifting forecasts.


The US labour market is cooling gently rather than cracking. September payrolls rose by only 29,000 and wage growth slowed to 3%, its weakest since 2021, but unemployment edged up only to 4.2% and participation rose to 61.8%, which the Fed can read as a “Goldilocks” outcome. US households remain gloomy, with sentiment near record lows, yet they keep spending: retail sales rose 0.8% in September, although only 0.2% excluding fuel. The divide is K-shaped, with higher-income households supported by strong asset prices and lower-income households squeezed by living costs.


Big Tech earnings: the hyperscalers report


The main event of the final week was Big Tech earnings, and the message was about cash. Meta, Alphabet, Microsoft and Amazon, the four largest spenders on AI infrastructure, all reported strong revenue and cloud growth, but three of the four reported negative free cash flow as capital spending outran the cash their businesses generate. Together they are guiding to roughly US$730 billion of capital spending this year, mainly on AI data centres, chips and power. Microsoft (whose shares finished higher over the month) was the exception, and the market noticed.


The market’s focus shifted from growth to cash. Alphabet’s shares fell more than 12% the day after it reported, despite Google Cloud revenue more than doubling, and disappointing results from Amazon and Intel helped push the Nasdaq Composite lower. Amazon and Microsoft both pointed to higher memory costs, and Microsoft said it will turn to the bond market, a reminder that AI spending is increasingly funded by external capital as well as operating cash flow. Semiconductor stocks were weak all month. The Philadelphia Semiconductor Index fell for eight straight sessions to 16 October, its longest losing streak since 2008. We discuss what this means for the wider AI debate in the “AI Bubble” section below.


AI bubble: overhyped, underhyped, or both?


Last month saw investors question the scale, financing and valuation of AI investment. Reports of lower-than-expected revenues at ChatGPT owner OpenAI reinforced the concern that, while demand is real, investors are becoming more selective about how it is funded and what price they pay.


The hyper-scaler results, covered above, turned that concern into a market event. Revenue and cloud growth were strong, but three of the four companies reported negative free cash flow against roughly US$730 billion of combined capital spending, and investors began asking not whether AI demand is real, but who is paying for the build-out and for how long it can be funded.


Have we entered a massive overinvestment cycle?

We are not convinced that AI has entered a late-stage overinvestment cycle. The build-out appears closer to the earlier phase of the internet boom, although the headline spending is enormous and input costs for chips, memory, electricity, cooling and computing capacity are rising quickly.

AI can be overhyped in the near term and underappreciated over the long term. Expectations are elevated, but this does not bear the hallmarks of a simple repeat of the dot-com bubble: the leading platforms have substantial revenue, earnings and customers, and far greater capacity to fund investment than heavily indebted newcomers. Valuations still require discipline, but strong earnings growth means headline P/E multiples do not tell the whole story. On a PEG basis, which compares the P/E ratio with expected earnings growth, many of these businesses look considerably less extreme. Nvidia, for example, trades at around 17 times forward earnings while forecasting revenue growth of about 70% next year.


The demand side


The demand side is still early. The chart below compares AI spending per employee since 2025 with US fixed broadband subscriptions from 1999, both rebased to 100. AI adoption today looks roughly comparable to broadband around 2000, when only about 3% of American households had access. The comparison is imperfect, but broadband kept growing strongly for another decade, and it suggests current AI spending may be an early stage of adoption rather than a peak. The beneficiaries are also spreading beyond chipmakers and software into power generation, grids and cooling, as long-term power agreements signed by several hyper-scalers illustrate.


What we are watching


Three things matter most from here. The first is whether businesses and consumers keep paying for AI as fast as the infrastructure is being built, because if spending on services slows while capacity keeps growing, supply may be getting ahead of demand. The second is how the spending is funded, since spending paid for from cash flow is less risky than spending paid for with debt or new share issues. The third is policy: with Democrats now set to control Congress, and with state-level opposition to data centres growing, construction could slow. That could ease costs for the big, cash-rich platforms, but it is a risk for heavily indebted builders. Finally, bubbles usually bring widespread speculation, and we are not yet seeing the kind of public euphoria that marked previous market peaks.


What it means for portfolios


Transformative technologies often attract periods of overinvestment, and the eventual winners are not always obvious at the outset. That is why we are selective. The Magnificent Seven are often treated as a single group, but October showed how differently they can behave: some are funding their AI spending from strong cash flow, while others are spending faster than they earn. There are members of that group we favour and others we do not, and we judge each on its own merits rather than owning the theme as a block.


Our focus is on companies with durable advantages, sound funding and a credible path from investment to sustainable earnings, at a price that still leaves room for a reasonable return. We remain disciplined where market expectations appear excessive.


Anthropic’s Listing: November could be a pivotal moment


Anthropic, the company behind Claude, filed its paperwork on 26 October to list on the Nasdaq under the ticker ANT. The share price and listing date haven’t been set, but media reports suggest shares could start trading in the weeks before the US Thanksgiving holiday on 26 November, subject to regulatory review and market conditions. It matters beyond Anthropic itself: it would be the first time public investors can directly put a price on a leading AI company, so how the shares are received could shape how the market thinks about AI valuations. A strong debut could help repair the sentiment hit in October, a weak one would add to concerns about AI spending, and a very large share sale could temporarily draw money away from other AI shares.


Valuations after the sell-off


The sell-off in the tech sector has also taken some heat out of valuations, because earnings have grown so quickly. The S&P 500’s forward price-to-earnings ratio ended October at about 18.7, below its five-year average of 19.8 and its ten-year average of 19.1, and well down from roughly 22 at the start of the year. The technology sector itself is now trading at its cheapest level relative to the S&P 500 since 2017, even though the sector is still delivering stronger earnings growth than the rest of the market. Valuation risk has not disappeared, particularly in the largest AI names, but the broader market is not as stretched as the headlines suggest.


The US Midterms: result and market reaction


The midterm elections, held just after month-end, added a new factor to the outlook for AI stocks. The Democrats appear to have won control of both the House and the Senate. A House result was widely expected, but the Senate outcome was less certain, with prediction-market odds for a Democratic majority rising above 90% as the night progressed. President Trump indicated he expects to work with the Democrats, and there has so far been no sign of a contested result, which removed one of the risks investors had been weighing.


The initial market reaction has been positive. A sharp fall in oil prices helped as investors bet the Democratic win will push the White House to end the war with Iran. No deal is close, but if lower oil prices last, they would ease the inflation pressure behind this year’s higher bond yields.


The policy issue to watch is data centres. Texas has roughly 27% of US data-centre capacity, and its newly elected Democratic governor has called for a moratorium and an end to tax incentives for new projects, while ballot measures on data-centre development were rejected in several states. We think this is more likely to slow the AI roll-out than stop it. Democrats won in states such as Texas that have long been Republican, and they will want to keep those voters and avoid alienating supporters who benefit from data-centre jobs, construction and power investment. That points to tighter conditions on planning, energy use and incentives rather than outright bans.


History also offers some comfort: since 1950 the S&P 500 has risen by an average of nearly 15% in the following 6 months post the mid-terms.

What shaped European markets?


European markets were mixed. The FTSE 100 gained 1.2% to finish the month at 10,730, helped by energy and defensive companies. The EURO STOXX 50 fell 2.2% as weakness in technology and higher oil prices weighed. Both indices remain comfortably positive for the year. Euro-area growth was better than feared, with GDP up 0.4% in the third quarter, twice the expected pace.


What shaped Asian markets?


Japan was among the weakest markets we track. The Nikkei 225 fell 5.2% in October as its heavy exposure to semiconductor and AI supply-chain companies worked against it, although it remains up 25.7% for the year. A weak yen kept policymakers alert to intervention.


Chinese and Hong Kong shares were also weak, with the CSI 300 suffering two weekly falls of roughly 3%, as company earnings disappointed and the global tech sell-off spread. The Chinese economy itself is two-speed: manufacturing and exports are doing the heavy lifting, retail sales growth picked up to 1.1% in September, but fixed investment is down 7.2% over the first nine months and property investment is down 20.6%.



What shaped Australian markets?



The S&P/ASX 200 gained 1.4% in October to finish at 8,908, with gains concentrated at the top end of the market and small caps weaker. The rotation was defensive and sharp: utilities rose about 10%, financials more than 9% and health care about 9%, while materials fell 6% and information technology fell around 3%. With limited exposure to the AI mega-caps, Australia’s banks and defensive sectors carried the index.


Inflation, jobs and the RBA


Economic data pulled in different directions. Unemployment held at a five-year high of 4.7% in September and employment fell by more than 39,000, which briefly cut the odds of another rate rise. But September inflation, released on 28 October, was hotter: headline CPI rose 0.8% in the month and 4.3% over the year, including a 9.4% surge in fuel, and trimmed-mean inflation of 3.7% was slightly above expectations, with sticky domestic services inflation suggesting the problem is not only imported energy.


After month-end, on 3 November, the Reserve Bank of Australia raised the cash rate by 0.25 percentage points to 4.85% on a 6–3 vote, its fifth increase of 2026 and the highest cash rate since November 2008. The Bank now expects headline inflation to peak at around 4.5% and to remain above 3% until late 2027, although it stopped short of signalling further rises. The strain on households is visible: Westpac–Melbourne Institute consumer sentiment fell 4.7% to 80.4, and Westpac’s own outlook is for house prices to fall 10.9% in the year to March 2027, unemployment to reach 4.8% and the first rate cuts not to arrive until the second half of 2027.



What shaped New Zealand markets?



The S&P/NZX 50 Gross Index was little changed in October, slipping around 0.4%, and the NZX 50 ended the month at 13,797 after a 0.5% gain in the final week. There were genuinely encouraging signs from the economy, although it remains a two-speed economy.


Economic activity and confidence


Manufacturing continues to be one of the brighter spots. The Manufacturing PMI rose to 56.5 in September from 53.3, with production and new orders both at 57.0, and the sector has now expanded for 15 consecutive months. Aside from June’s spike, it was the strongest reading since 2021, and growth was broad-based across industries. Services are recovering more gradually: the Performance of Services Index held at 50.9, a fourth consecutive month of expansion after two years of contraction, with employment the weak spot. A weaker New Zealand dollar is a tailwind for exporters.


Business confidence picked up noticeably. The QSBO showed a net 40% of firms now expect economic conditions to improve, up from just 14% previously, and hiring and investment intentions improved as well, although actual activity is still lagging that optimism and pricing and cost pressures eased rather than accelerated. Consumers remain more cautious: ANZ-Roy Morgan consumer confidence slipped to 96.2 in October from 97.6, with current conditions weaker but expectations for finances a year ahead improving. The rural economy had good news, with two consecutive positive dairy auctions: prices rose 1.2% and then 2.5%, the strongest gain since early March, led by whole milk powder.


Inflation remains the complication. Annual CPI eased from 4.1% to 3.7% in the September quarter, slightly better than the Reserve Bank’s 3.9% forecast, but petrol is still 19.1% higher than a year ago, 85.5% of the CPI basket rose in price, and Stats NZ estimates headline inflation would have been 3.2% without petrol.


The Reserve Bank of New Zealand then surprised markets by holding the Official Cash Rate at 2.75% in a 4–3 vote, when almost every major bank had expected an increase. We agreed with the decision and our portfolios were positioned for it. With unemployment at 5.6%, around a decade high, GDP growth of only 0.2% in the June quarter and weak household demand making it hard for firms to pass on costs, the decision gives the Bank more time to assess whether fuel-driven inflation is becoming embedded in domestic prices. The Bank expects inflation to reach about 4.4% this quarter, largely because of fuel. The next decision is in December, and the General Election on 7 November adds another layer of uncertainty.


Corporate developments


There were green shoots at company level. Hallenstein Glasson rose to a record high after a near 50% increase in annual profit, Fletcher Building reported first-quarter volumes ahead of last year across most businesses, although commercial construction and Auckland residential remain soft, and Vulcan Steel was stronger still, with first-quarter revenue up 39%, daily volumes up 27% and earnings up 51%. Skellerup reported first-quarter profit 15% ahead, while Air New Zealand highlighted the other side of the ledger: jet fuel averaged US$140 a barrel in the quarter versus US$85 a year ago, forcing it to cut capacity and lift fares.


Early November brought more corporate news, including KMD Brands confirming exclusive talks with Bluestar Alliance over a potential takeover (there is no binding offer), and The Warehouse setting a target of NZ$100 million of operating profit within three to five years. Overall, the kiwi economy is improving, but it is certainly not firing on all cylinders just yet.



Generate's portfolio positioning


Selective exposure across AI infrastructure, including memory, optical networking, semiconductor equipment, power generation and energy infrastructure. Preference for companies with durable competitive advantages, strong balance sheets and a credible path from investment to sustainable free cash flow. Broader portfolio diversification as market leadership rotates beyond the largest technology companies.


October’s market rotation reinforced the value of active security selection. Generate retains exposure to the long-term AI theme, but the emphasis is on where economic value is most likely to accrue rather than on the theme alone. This includes enabling businesses, as well as selected optical-networking, semiconductor-equipment, power-generation and energy-infrastructure companies. Position sizes and valuations remain central to the process, particularly where capital requirements are rising or funding depends more heavily on external markets. This approach is designed to participate in structural growth while limiting reliance on a small group of highly valued companies.


Looking ahead - market outlook and key issues for November


The main things we are watching in November are how Anthropic’s share sale goes, whether worries about AI spending ease or get worse after the Big Tech results, and what happens to oil and inflation as the Iran war develops. We are also watching central banks and US jobs data, then the Fed and the RBNZ in December. The wider effects of the US midterm result, especially on data centres, tax and financial rules, are still being worked out. New Zealand’s General Election is on 7 November.


Markets enter November with the economy holding up and company profits solid, but with interest rates higher and investors more nervous about AI. The big question is whether AI companies’ revenue and cash flow can keep up with how much they are spending. Company results, economic data and any big share sales in the coming weeks should give us more answers. We are alert to opportunities as they come up, particularly where prices have fallen further than the businesses justify.


History is on investors’ side after midterm elections, although it can’t predict what happens next. Lower technology valuations and solid profits could support markets into 2027, but what happens will depend on inflation, government policy (including data-centre policy) and whether companies deliver on earnings.


Closer to home, we will be following how coalition negotiations play out and the potential impact on various sectors. We are also watching Australia closely, with the economy showing signs of creaking. Both situations may create opportunities.


For long-term investors, the outlook is positive but selective. We stay focused on spreading risk across our portfolios, owning good businesses with strong balance sheets, and not overpaying for future growth.



Official source index 


The links below point to official data, research and monetary-policy pages referenced in this market update. 


Disclaimers